Introductory Business Concepts

Forms of Business Organisation

(special thanks to Geoff Leese)

Objectives

• Consider the different types of business organisations operating in the private sector

• Consider the advantages & disadvantages of each type of organisation

Types of Business Organisations

Private Sector

Sole Trader Partnerships Companies

Private limited companies Public limited companies

Franchise

Cooperatives

Sole Trader

• Owned financed and controlled by one individual but can employ other staff

• Traditionally common in local building firms, small shops, restaurants, butchers

• Today many people are setting up their own businesses by creating small web-based companies working from home

Sole Trader

Advantages• Requires little capital• Easy to set up• Personal incentive –

• keep all the profits • make key decisions• high degree of control

• Flexibility• Ability to offer personal service

Sole Traders

Disadvantages

• Unlimited Liability• Limited access to capital• Potential for long hours• Pressure of being solely responsible• Lack of continuity – business ceases once

owner dies• No cover for illness

Business Organisations

• Sole traders can overcome these disadvantages by becoming a partnership

Partnerships

• Owned, financed and controlled by between 2 & 20 partners

• Terms of Partnership agreed through contract

• Bound by the terms of the Partnership Act 1890

• Common in professions – lawyers, accountants, architects, surveyors, estate agents, vets etc

Partnerships

Advantages

• Each partner contributes capital• Shared responsibility• Greater opportunity for specialisation• Easy to set up

Partnerships

Disadvantages

• Unlimited Liability (However since 2001, Partnerships can apply to be Limited Partnerships)

• All partners liable for the debts of the others • Partnership dissolved on death of one partner• Potential for conflict• Decisions of one partner binding on the rest• Limited access to capital

Private limited companies

• Usually small family business• Owned by between 2 and 50

shareholders• Directors elected by shareholders

Private limited company

• Advantages– Limited liability– Shareholders contribute capital– Protected from takeovers

• Disadvantages– Still limited capital– Limited economies of scale

Public limited companies

• Owned by minimum of 2 but no maximum number of shareholders

• Example Boots

• Directors elected by shareholders

• Has a separate legal identity – the company can sue and be sued

• Minimum share capital of £50,000

Public limited companies

• Advantages– Large amount of capital can be raised– Economies of scale

• Disadvantages– Unwanted takeover possible– Can be remote from customers– Potential diseconomies of scale

Co-operatives

• Controlled by a committee• Ownership, finance and control in hands of

‘members’• Exists for the benefit of ‘members’

– Consumer co-ops – members buy goods in bulk, sell to members, divide profits between members

– Worker co-operatives – workers buy the business and run it – decisions and profits shared by members

– Producer co-operatives – producers organise distribution and sale of products themselves

Franchises

• Method of Business Organisations backed by established ‘brand’ name

• Franchisee – pays a fee for the purchase of the franchise

• Common franchises – Body Shop, McDonalds, Costa Coffee, Subway

Franchises

• Advantages– Owner gets to run a business with less ‘risk’– Owner buys the right to use the established

companies name, format products, logos, display units, methods etc.

– Speedy way for business to expand– Become very popular

Franchises

• Disadvantages– Owner – (Franchisee) responsible for debts– Franchisee pays a royalty to owners of the

brand– Franchisee must adhere to pricing policy of

parent company and so it can be difficult to realise high profits

Conclusion

• Considered the various types of business organisations

• Considered the advantages & disadvantages of each

• Useful Websites– http://www.thetimes100.co.uk

• Lots of very useful stuff there!